ADVANCED ACCOUNTING – Model exam – ANSWER KEY (Inter New)

1.
a)
i. REPURCHASE AGREEMENT i.e., where seller concurrently agrees to repurchase
the same goods at a later date,
The resulting cash inflow is NOT A REVENUE AS DEFINED AND SHOULD NOT BE
RECOGNISED AS REVENUE.
ii. CONSIGNMENT SALES : delivery is made whereby the recipient undertakes to
sell the goods on behalf of the consignor.
Revenue SHOULD NOT BE RECOGNISED UNTIL THE GOODS ARE SOLD TO A
THIRD PARTY
iii. ADVERTISING AGENCY COMMISSION
REVENUE SHOULD BE RECOGNISED WHEN THE SERVICE IS COMPLETED.
For advertising agencies, media commissions will normally be recognized when
the related advertisement or commercial appears before the public and the
necessary intimation is received by the agency, as opposed to production
commission , which will be recognized when the project is completed.
iv. TRADE DISCOUNTS AND REBATES
Trade discounts and volume rebates received are not encompassed within the
definition of revenue, since they represent reduction in costs. They should be
deducted in determining revenue.
v. TUITION FEES
Revenue should be recognized over the period of INSTRUCTION.

b) A provision should be recognized only when an enterprise has a present obligation

arising from a past event or obligation. In the given case, there is no present obligation
but a future one, therefore no provision is recognized as per AS 29.
The cost of overhauling aircraft is not recognized as a provision because it is a future
obligation and the incurring of the expenditure depends on the company’s decision to
continue operating the aircrafts. Even a legal requirement to overhaul does not require
the company to make a provision for the cost of overhaul because there is no present
obligation to overhaul the aircrafts. Further, the enterprise can avoid the future
expenditure by its future action, for example by selling the aircraft. However, an
obligation might arise to pay fines or penalties under the legislation after completion of
five years. Assessment of probability of incurring fines and penalties depends upon the
provisions of the legislation and the stringency of the enforcement regime. A provision
should be recognized for the best estimate of any fines and penalties if airline continues
to operate aircrafts for more than five years.

c) Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of

discontinuing operations. According to Paragraph 9 of AS 24, examples of activities
that do not necessarily satisfy criterion (a) of paragraph 3, but that might do so in
combination with other circumstances, include:
 (i) Gradual or evolutionary phasing out of a product line or class of service;
(ii) Discontinuing, even if relatively abruptly, several products within an ongoing line
of business;
(iii) Shifting of some production or marketing activities for a particular line of business
from one location to another; and
(iv) Closing of a facility to achieve productivity improvements or other cost savings.
An example in relation to consolidated financial statements is selling a subsidiary whose activities
are similar to those of the parent or other subsidiaries.

d) Mr. A will not be considered as a related party of SP Hotels Limited in view of paragraph
3(c) of AS 18 which states, “individuals owning, directly or indirectly, an interest in the voting
power of the reporting enterprise that gives them control or signific ant influence over the
enterprise, and relatives of any such individual”. In the above example, in the absence of
share ownership, Mr. A would not be considered to exercise significant influence on SP
Hotels Limited, even though there is an agreement giving him the power to manage the
company. Further, the fact that Mr. A does not have the ability to direct or instruct the board
of directors does not qualify him as a key management personnel.
2.
a) The vesting of options is subject to satisfaction of two conditions viz. service condition of
continuous employment for 3 years and market condition that the share price at the end of
2013-14 is not less than ` 70. Since the share price on 31/03/14 was ` 68, the actual
vesting shall be nil. Despite this, the company should recognise value of option over 3-
year vesting period from 2011-12 to 2013-14.
Year 2011-12
Fair value of option per share = ` 9
Number of shares expected to vest under the scheme = 48 × 1,000 = 48,000 Fair value
= 48,000 × ` 9 = ` 4,32,000
Expected vesting period = 3 years
Value of option recognised as expense in 2011-12 = ` 4,32,000 /3 = ` 1,44,000
Year 2012-13
Fair value of option per share = ` 9
Number of shares expected to vest under the scheme = 47 × 1,000 = 47,000 Fair value
= 47,000 × ` 9 = ` 4,23,000
Expected vesting period = 3 years
Cumulative value of option to recognise as expense in 2011-12 and 2012-13
= (` 4,23,000/ 3) × 2 = ` 2,82,000
Value of option recognised as expense in 2011-12 = ` 1,44,000 Value of
option recognised as expense in 2012-13
= ` 2,82,000 – ` 1,44,000 = ` 1,38,000
Year 2013-14
Fair value of option per share = ` 9
Number of shares actually vested under the scheme = 45 × 1,000 = 45,000 Fair value =
45,000 × ` 9 = ` 4,05,000
Vesting period = 3 years
Cumulative value of option to recognise as expense in 2011-12, 2012-13 and 2013-14 =
` 4,05,000
Value of option recognised as expense in 2011-12 and 2012-13 = ` 2,82,000
Value of option recognised as expense in 2013-14 = ` 4,05,000 – ` 2,82,000 =
` 1,23,000
Employees’ Compensation A/c

Year ` Year `
2011-12 To ESOP Outstanding A/c 1,44,000 2011-12 By Profit & Loss A/c1,44,000
1,44,000 1,44,000
2012-13 To ESOP Outstanding A/c 1,38,000 2012-13 By Profit & Loss A/c1,38,000
1,38,000 1,38,000
2013-14 To ESOP Outstanding A/c 1,23,000 2013-14 By Profit & Loss A/c1,23,000
1,23,000 1,23,000

ESOP Outstanding A/c

Year ` Year `
2011-12 To Balance c/d To Balance c/d 1,44,000 2011-12 By Employees’ Compensation A/c 1,44,000
1,44,000 1,44,000
2012-13 To General Reserve 2,82,000 2012-13 By Balance b/d 1,44,000
By Employees’ Compensation A/c1,38,000
2,82,000 2,82,000
2013-14 4,05,000 2013-14 By Balance b/d 2,82,000

By Employees’ Compensation A/c 1,23,000

4,05,000 4,05,000

b)
Statement determining the maximum number of
shares to be bought back
Number of shares (in crores)

Particulars When loan fund is

Rs. 3,200 Rs. 6,000
crores crores
Shares Outstanding Test (W.N.1) 30 30
 Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be bought back [least of the 24 Nil
above]

Journal Entries for the Buy Back

(applicable only when loan fund is
Rs.3,200 crores)
Rs. in crores
Debit Credit
(a) Equity share buyback account Dr. 720
To Bank account 720
(Being payment for buy back of 24 crores equity shares of Rs. 10 each @
Rs. 30 per share)
(b) Equity share capital account Dr. 240
Premium Payable on buyback account Dr. 480
To Equity share buyback account 720
(Being cancellation of shares bought back)
Securities Premium account General Reserve / Profit Dr. 400
& Loss A/c Dr. 80
To Premium Payable on buyback account 480
(Being Premium Payable on buyback account charged to securities
premium and general reserve/Profit & Loss A/c)

(c) General Reserve / Profit & Loss A/c Dr. 240

To Capital redemption reserve account 240
(Being transfer of free reserves to capital redemption reserve to the extent of
nominal value of share capital bought back out of redeemed through free
reserves)
Working Notes:

1. Shares Outstanding Test

Particulars (Shares in crores)
Number of shares outstanding 120
25% of the shares outstanding 30

2. Resources Test
Particulars
 Paid up capital (Rs. in crores) 1,200
Free reserves (Rs. in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (Rs. in crores) 2,880
25% of Shareholders fund (Rs. in crores) Rs. 720 crores
Buy back price per share Rs. 30
Number of shares that can be bought back 24 crores shares

Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds
post Buy Back
Particulars When loan fund is
Rs. 3,200 Rs. 6,000
crores crores
(a) Loan funds (Rs.) 3,200 6,000
(b) Minimum equity to be maintained after buy back in the ratio 1,600 3,000
of 2:1 (Rs.) (a/2)
(c) Present equity shareholders fund (Rs.) 2,880 2,880
(d) Future equity shareholders fund (Rs.) (see W.N.4) 2,560 (2,880- N.A.
320)
(e) Maximum permitted buy back of Equity (Rs.) [(d) – (b)] 960 Nil

(f) Maximum number of shares that can be bought back @ Rs. 32 crore
30 per share shares Nil
As per the provisions of the Companies Act, 2013,
company Qualifies Does not
Qualify

3.
a) A company may issue sweat equity shares of a class of shares already issued, if the
following conditions are fulfilled, namely:-
i. the issue of sweat equity shares is authorised by a special resolution passed
by the company in the general meeting.
ii. the resolution specifies the number of shares, current market price, the
consideration if any, and the class or classes of directors or employees to
whom such equity shares are to be issued.
iii. not less than one year has, at the time of the issue, elapsed since the date
on which the company was entitled to commence business.
iv. the sweat equity shares of company, whose equity shares are listed on a
recognised stock exchange, are issued in accordance with the regulations made
by the Securities and Exchange Board of India (SEBI) in this behalf. But in the
case of company whose equity shares are not listed on any recognised stock
 exchange, the sweat equity shares are issued in accordance with the rules as
may be prescribed.

b)
Wealth Bank Limited
Profit and Loss Account

For the year ended 31st March, 2018

` in lakhs
Particulars Schedule Year ended 31-3-2018

I Income
Interest earned 13 766
Other income 14 50
816
II Expenditure
Interest expended 15 54
Operating expenses 16 468
Provisions and Contingencies (Refer W.N.) 158.96
680.96
III Profit/Loss
Net Profit/(Loss) for the year 135.04
Net Profit/(Loss) brought forward Nil
135.04
IV Appropriations:
Transfer to Statutory reserve (25% of the profits) 33.76
Balance carried to the balance sheet 101.28
Total 135.04

Schedule 13 - Interest Earned

Year ended 31-3-2018
(` in lakhs)
I Interest/discount on advances/bills
280
Interest on overdraft (150-100) 50
Interest on term loans (308-70) 238 568
II Income on investments 168
III Interest on Balance with RBI 30
 766
Interest on NPA is recognized on cash basis, hence difference of accrued interest not received have
been reduced from the total accrued interest.
Schedule 14 - Other Income
Year ended 31-3-2018
(` in lakhs)
I Commission, Exchange and Brokerage:
Commission on remittances and transfer 15
Commission on letter of credit 24
Commission on Government business 16 55
II Profit on sale of Land and Building 5
III Loss on Exchange Transactions (10)
50

Schedule 15 - Interest Expended

Year ended 31-3-2018

(` in lakhs)

I Interest on Deposits
Fixed deposits 25
Recurring deposits 17
Saving bank deposits 12 54

Schedule 16 - Operating Expenses

Year Ended 31-3-2018

(` in lakhs)
I Payment to and provision for employees
Salaries, allowances and bonus 248
Provident Fund Contribution 56 304
II Printing and Stationery 28
III Advertisement and publicity 36
IV Directors’ fees, allowances and expenses 50
V Auditors’ fees and expenses 24
VI Postage, telegrams, telephones etc. 16
VII Repairs and maintenance 10
468
 Working Note:

Provisions and contingencies (` in lakhs)

Provision for Advances:
Standard 60 × 0.40% 0.24
Sub-standard 22 × 15% 3.3
Doubtful not covered by 40× 100% 40
security
Doubtful covered by security:
Less than 1 year 6 x 25% 1.5 4.7
More than 1 year but less 3 x 40% 1.2
than 3 years 2 x 100% 2.0
More than 3 years
Loss Assets (38 × 100%) 38
86.24
Provision for tax 35% of (Total Income –
Total Expenditure)
35% of [816-(54 + 468 + 86.24)]
35% of 207.76 72.72
158.96

4.
5.
a) Capital Employed at the end of each year (` In lakhs)

31.3.2016 31.3.2017 31.3.2018

` ` `
Land &Building (Revalued) 1,450 1,580 1,750
Plant & machinery 2,650 2,520 2,380
Inventory (Revalued) 1,520 1,830 2,140
Trade Receivables 760 950 1,055
Cash at Bank 150 168 45
Total Assets 6,530 7,048 7,370
Less: Trade Payables (630) (738) (850)
Term loan (250) (230) (210)
12% debentures (75) (75) (75)
Closing Capital employed 5,575 6,005 6,235
Add: Opening Capital employed 5,185 5,575 6,005

Total 10,760 11,580 12,240

Average Capital employed 5,380 5,790 6,120

Valuation of Goodwill (` In lakhs)

(i) Future Maintainable Profit 31.3.2016 31.3.2017 31.3.2018

Net Profit as given 1,325 1,550 1,660
Less: Opening Balance (350) (415) (565)
Adjustment for Valuation of Opening Inventory (310) (310)
 Add: Adjustment for Valuation of closing 310 310 310
inventory
Transferred to General Reserve 200 280 170
Future Maintainable Profit 1,485 1,415 1265
Less: 10% Normal Return on Avg. Capital
Employed 538 579 612
(ii) Super Profit 947 836 653

(i) Average Super Profit = ` (947+836+653)÷3 = ` 812 Lakh

(ii) Value of Goodwill at four years’ purchase= ` 812 lakh × 4 = ` 3248 lakh

b) Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd.as on 31st March, 2017
Particulars Note No. ` in lakhs
I Equity and Liabilities
1 Shareholders’ Funds
(a) Share Capital 1 19,000
(b) Reserves and Surplus 2 5,620
2. Minority interest 3 3,400
3. Current Liabilities
(a) Trade payables 4 2,623
Total 30,643

II Assets
1 Non Current Assets
Fixed Assets
(i) Tangible Assets 5 17,435
2 Current Assets
(a) Inventories 6 6,632
(b) Trade Receivables 7 4,842
(c) Cash and Cash equivalents 8 1,734
30,643

Notes to Accounts

` in
lakhs
1. Share Capital
Issued, Subscribed and Paid up (1,500 lakh Equity Shares of ` 10 each 15,000
fully paid up)
400 lakh Preference Shares of ` 10 each fully paid up 4,000
 19,000
2. Reserves and Surplus
Credit Balance of Profit & Loss Account 2,750
Less: Capital Receipt wrongly credited (Dividend @ 10% on ` 4500 Lakh 450
Equity Shares)
2,300
Add: Share in Y Ltd. Revenue Profit (Working Note i) 825
3,125
Less: Unrealised Profit (Working Note iv) 3,095
3
0
Capital Reserve (Working Note iii) 25
General Reserve 2,500 2,525
5,620
3.
Minority interest
100 Lakh Preference Shares of ` 10 fully paid up 1,000
150 Lakh Equity Shares of `10 each fully paid up 1,500 2,500
Share in Revenue Profits (Working Note i) 275
Share in Capital Profit (working Note ii) 625 900
3,400
4.
Trade payables
X Ltd. 1,646
Y Ltd. 1,027
2,673
Less: Mutual owing 2,623
5
0
5. Tangible Assets
Land & Building
X Ltd. 3,550
Y Ltd 1,510 5,060
Plant & Machinery
X Ltd. 5,275
Y Ltd (Working note v) 4,500 9,775
Furniture & Fixtures
X Ltd. 1,945
Y Ltd 655 2,600
17,435
6.
 Inventories
X Ltd. 4,142
Y Ltd 2,520
6,662
Less: Unrealized Profit (30) 6,632

7. Trade Receivables
X Ltd. 3,010
Y Ltd 1,882
4,892
Less: Mutual Owing 50 4,842
8. Cash & cash Equivalents
X Ltd. 1,174
Y Ltd 560 1,734

Working Notes

(i) Calculation of Revenue Profits

Y’s Ltd Profit & Loss Account

` in lakh ` in lakh
To Equity Dividend By Balance b/d 650
10 % of 6,000 lakh 600 By Net profit for the year (Bal Fig.)
1,200
To balance c/d 1,250
1,850 1,850
Depreciation provided on Plant & Machinery
Balance as on 1st April, 2016 4,000
Less Balance as 31st March 2017 3,600
400
Hence rate of Depreciation = 400/4000 x 100 10%
Net Profit for the year ended 31st March 2017 1,200
Less: Additional Depreciation 100
Revenue Profit 1,100
X Ltd’s share- 1100 x 450/600 825
Y Ltd’s share = 1100 x150/600 275

(ii) Calculation of Capital Profits

Profit & Loss Balance as on 1st April, 2016 650
 Less: Dividend Paid 600
50
Add: General Reserve as on 1st April, 2016 1,450
Add: Profit on Revaluation of Plant & machinery 1,000
Capital Profit 2,500
X Ltd’s Share in Capital Profit = 2,500 x 450/600 1,875
Y Ltd’s Share in Capital Profit = 2,500 x 150/600 625
(i) Calculation of Capital Reserve
Paid up value of 450 Lakh equity shares 4,500
Add: Share in Capital Profits 1,875
6,375
Amount Paid to acquire the 450 Lakh Equity Shares 6,800
Less: Dividend received out of Pre acquisition profits 450
6,350
Capital Reserve = 6,375-6,350 25
(ii) Unrealised Profit
` 150 Lakh x 25/125* = 30 lakh
(iii) Plant & Machinery of Y Ltd.
Balance as on 31st March, 2017 3,600
Add: Addition due to revaluation 1,000
Less: Depreciation on additional Value of Plant & Machinery 100 900
@ 10 %
4,500
* ` 150 lakh considered as cost to Y ltd.

6.
a) On the basis of the information given, in respect of hire purchase and leased assets, additional
provision shall be made as under:
(` in crore)
(a) Where hire charges are Nil -
overdue upto 12 months
(b) Where hire charges are 10% of the net book value 172.50
overdue for more than 12 10% x (675+1,050)
months but upto 24 months
(c) Where hire charges are 40 percent of the net book value 90
overdue for more than 24 40% x 225
months but upto 36 months
(d) Where hire charges or lease 70 percent of the net book value 14,840
rentals are overdue for more 70% x 21,200
than 36 months but upto 48
months
 Total 15,102.50

b) Calculation of Closing per unit of NAV of the fund

` in lakhs
Net Assets of Sparrow holding
Closing cash balance (W.N.2) 79.99
Closing Market Value of Investments 1,120.23
Accrued Dividends (collectable) 0.25
1,200.47
Less: Current Liabilities
Outstanding Management Fee (payable) (0.47)
Closing Net Assets (A) 1,200.00
Units outstanding (in lakhs) (B) 100.00
NAV per unit (A/B) 12.00

Working Notes:

` in
lakhs
1. Computation of opening cash balance
Proceeds of NFO in full including underwriters 1000.00
commitment
Less: Initial Purchase of Securities (892.50)
107.50
Less: Underwriting Commission 15.00
Marketing Expenses 11.25 (26.25)
Opening Cash Balance 81.25
2. Computation of Closing cash balance
Opening bank balance (W.N.1) 81.25
Add: Proceeds from sale of securities 141.25
Dividends received on investment 2.26 143.51
224.76
Less: Cost of Securities purchased 130.00
Management Expenses (W.N.3) 1.76
Capital Gains Distributed ` (141.25 - 127.25 x 80%) 11.20
Dividends Distributed ` (2.26 x 80%) 1.81 (144.77)
Closing cash balance 79.99
3. Computation of Management Expenses Chargeable
 Actual Expense Incurred [A] 2.47
Opening Investment Made 892.50
Closing Funds Invested (892.50 - 127.25 + 130) 895.25
Total 1,787.75
Average Funds Invested (1,787.75/2) 893.875
0.25% of Average Funds Invested [B] 2.23
Lower of A or B 2.23
Less: Amount unpaid (0.47)
Management expenses paid 1.76

c) Schedule III to the companies Act, 2013 provides that:

“A liability should be classified as current when it satisfies any of the following criteria:
i. it is expected to be settled in the company’s normal operating cycle;
ii. it is held primarily for the purpose of being traded;
iii. it is due to be settled within twelve months after the reporting date; or
iv. the company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date. Terms of a liability
that could, at the option of the counterparty, result in its settlement by the
issue of equity instruments and do not affect its classification.”
In the present situation, Astha Ltd. does not have an unconditional right to defer settlement of
the liability for at least 12 months after the reporting date. The position will be same even when
the FCCB holders are expected to convert their holdings into equity shares of Astha Ltd.
Expectations cannot be called as unconditional rights. Thus, in both the situations, Astha Ltd.
should classify the FCCBs as current liabilities as on 31 March 2016.
d)
Basis Internal Reconstruction External Reconstruction
Liquidation The existing company is not liquidated. The existing company is liquidated.

Formation No new company is formed but only the rights of A new company is formed to take
shareholders and creditors over the liquidated company.
are changed.

Reduction of There is certain reduction of capital and There is no reduction of capital. In

capital sometimes the outside liabilities like debenture fact there is a fresh share capital of
holders may have to reduce their claim. the company.
Legal position Internal reconstruction is done as per provisions External reconstruction is regulated
of section 66 of the Companies Act, 2013. by section 232 of the Companies
Act, 2013.